Auditors should discern between SMSFs in accumulation phase and those funds in pension phase when assessing asset valuations due to different consequences applicable to each situation, a specialist practitioner has said.
“Do I distinguish between accumulation funds and pension funds? Of course, because when we talk about risk assessment and risk management 101, when we’re assessing risk [we have to] consider the likelihood of the issue occurring and the magnitude or the consequences,” ARC Super director Ashley Course told delegates at The Auditors Institute SMSF Auditors Day 2024 held recently in Sydney.
Course argued the merits of this approach with two examples illustrating how the magnitude of the flow-on effects of an inaccurate asset valuation is significantly more serious for members of a fund that is entirely in pension phase.
“If you’ve got a [couple in their 40s] and the assets [of the fund are valued] at $1 million when they are really $1.5 million, then you have a breach of [Superannuation industry (Supervision) (SIS) Regulation] 8.02B potentially [that requires all assets in the SMSF be valued at market value] and not much more,” he noted.
“But if [the clients] are in pension mode, then we have other issues. [For example, if a fund had a property valued at] $1.2 million when [it should have been] $3.6 million, if they’re [making drawdowns of] 5 per cent on $1.2 million, but they really should be paying 5 per cent of $3.6 million, now we have a tax problem and a [SIS Regulation] 1.06 (9A) problem.
“So the magnitude of that issue has been enhanced.”
According to Course, asset valuations are not the only element on which auditors need to pay particular attention.
“I also [take note] if the fund is leasing a property to related parties because now if something is wrong, you’ve got a sole purpose issue, a [SIS Act section] 65 issue possibly, a [SIS Act section] 109 issue [and] an in-house asset issue,” he said.
“[In the example used], if that $1.2 million property was leased to a related business for a [return of] 5 per cent, when it should have been leased to that related business at 5 per cent of $3.6 million potentially … [that throws up] all sorts of additional issues to consider.”
